$100b climate forex guarantee sought

It will provide currency guarantees to investors in poorer countries

LONDON:

A top-level meeting in Paris next month will lay out a $100 billion plan to drive more money into climate and development finance in poorer countries by providing currency guarantees to investors, according to a document seen by Reuters.

The plan, which has not previously been reported, was sent to the world’s governments ahead of the “Summit for a New Global Financing Pact” in Paris in June by the Bridgetown Initiative spearheaded by Barbados leader Mia Mottley.

The idea, in a consultation document dated April 2023, would rely on the firepower of the International Monetary Fund (IMF) and other multilateral development banks (MDBs), and forms part of growing efforts to reform the international financial system.

It would see the IMF and other MDBs “cut the excessive macro-risk premia on developing countries with $100 billion per year of foreign exchange guarantees”, for financing in more volatile domestic currencies rather than the dollar or euro.

The guarantees would be for “just green transition investments”, which one source involved in the plans said could include “green” bonds focused on environmentally friendly projects as a well as others such as ocean-focused “blue” bonds and sustainability-linked bonds.

Their benefit is that the MDBs would step in and compensate international buyers of those bonds if the country involved devalued its currency and effectively cut the dollar-value of its bond payments.

By removing that risk for investors, it should significantly reduce the rates of interest the governments have to pay. For some it could even be the boost needed to regain access to global capital markets lost during the Covid pandemic.

A report released at the COP27 climate talks suggested developing countries would need $1 trillion a year in public and private money annually by 2030 to tackle global warming, yet to-date capital flows are just a fraction of what is needed.

Published in The Express Tribune, May 28^th, 2023.

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